May 11, 2020

How Much Money Is Left In The Paycheck Protection Program, And How Will The IRS Treat Its Beneficiaries?

According to data released by the U.S. Small Business Administration (SBA), the Paycheck Protection Program (PPP), which provides forgivable loans to businesses with less than 500 employees, still has $125 billion left to give. Struggling companies that are trying to keep their employees attached to the workforce should apply as quickly as possible through their local financial institution if they are interested in this program.

There is some new information that businesses should know about the program before they apply. In a webinar last week, the U.S. Chamber of Commerce noted:

  • Employers who want to bring back employees who have been laid off will not be penalized in PPP loan forgiveness if the employee chooses not to return to work. (The SBA actually has released a new Frequently Asked Questions document that tries to address what happens to an employer’s PPP loan forgiveness if and when they offer to re-hire an employee they had laid off. The ReedSmith Law Firm also has provided advice for employers dealing with employees who refuse to return. Its article is available here.)
  • Businesses need to develop and document their plans for reopening and dealing with sick employees. They must ensure they are listening to employees and have a dialogue with them about the company’s plans and their concerns.
  • Loans are forgivable through June 30, 2020, and it is not known yet whether the window for loan use and forgiveness will be expanded beyond that date.

In addition to providing more funding for the program, as part of the next COVID-19 spending bill, lawmakers could consider significant PPP changes that would address employer complaints that existing rules are incomplete and unworkable, including:

  • Lengthening the period of time for which small businesses can spend the money;
  • Allowing businesses to spend less of the aid to retain employees and more to cover fixed costs like rent;
  • Ensuring businesses whose loans are forgiven will not be taxed for taking a PPP or other government loan; and
  • Expanding relief to larger companies.

As part of those efforts, last week a bipartisan group of 19 U.S. senators wrote to U.S. Treasury Steve Mnuchin asking that he allow PPP recipients to spend more of the money on nonpayroll expenses without incurring a penalty. Currently, PPP loans are only forgiven if at least 75 percent of the proceeds are used to cover payroll. The letter requests that threshold to be reduced to 50 percent. U.S. senators also have introduced legislation to clarify that businesses can deduct expenses paid with a forgiven PPP loan from their taxes.

That legislation is necessary because, on April 30, the IRS issued guidance that prevents businesses from deducting expenses like rent and wages even though those types of expenses normally are deductible. Specifically, the guidance says businesses are not allowed to deduct an expense if payment of that expense results in forgiveness of a PPP loan.

The impact of the rule could substantially increase the tax liability of PPP loan recipients at the worst possible time. For C-Corporations, it could increase the net after tax benefit of PPP loan forgiveness by up to 21 percent. For pass-through businesses, the marginal increase could be as high as 37 percent. Senate Finance Committee Chairman Chuck Grassley (R-Iowa) has argued that the IRS’ guidance runs contrary to Congress’ intention for the PPP.  Treasury Secretary Mnuchin stood by the IRS guidance, however, arguing that the IRS is just trying prevent companies from “double dipping” since the PPP loans, even if forgiven, are not taxable.

As a reminder, all of the SBA’s PPP information is at www.sba.gov/paycheckprotection. Information from the U.S. Department of the Treasury is at www.treasury.gov/cares. Click here for the U.S. Chamber of Commerce’s guide about how to apply for the PPP and other emergency loans.